As part of a broader research note on Healthcare Technology & Services, Deutsche Bank analyst George Hill started coverage of CVS Health (CVS) with a Buy rating as he views the stock's valuation as "highly compelling." Bearish on Walgreens Boots Alliance (WBA), the analyst initiated the stock with a Sell rating and warned that the company's stand-alone pharmacy business strategy will face "unrelenting competitive and reimbursement pressure."
LAUNCHING ON MCOS WITH POSITIVE VIEW: In a research note to investors, Deutsche Bank's Hill initiated coverage of the Managed Care, Drug Supply Chain and Beneficiary Technology spaces with a positive sector view, and noted generally attractive valuations. However, the analyst acknowledged that the shares could be range bound given the overhand of the 2020 election. Investors fear the "bogeyman of healthcare reform" will finally emerge from the "Washington DC cellar," and this will likely weigh on share prices and valuations through November 2020, he contended. Hill launch coverage of CVS as his top pick, though he believes Anthem (ANTM), Cigna (CI), Centene (CNC) and Molina (MOH) all offer "attractive potential returns" based on his target prices. Meanwhile, the analyst is negative on the stand-alone retail pharmacies such as Walgreens, Rite Aid (RAD) and Diplomat Pharmacy (DPLO).
BUY CVS, CIGNA, ANTHEM: Calling it his Top Pick, Deutsche Bank's Hill initiated CVS Health with a Buy rating and a $91 price target. The analyst believes the company is "well positioned" to deliver on a vertical integration care delivery strategy, capturing market share and generating positive earnings surprises. Hill also sees the valuation of CVS shares as "highly compelling" and capturing potential execution and integration risks. The analyst also started coverage of Cigna with a Buy rating and a $207 price target as he believes the company's Pharmacy Benefit Management, or PBM, segment does not contain the significant short-term earnings risk implied by the "steep discount" of the stock price. Further, Hill argued that its core commercial MCO and the perceived cross sales benefit could drive its multiple expansion.
Even though he sees some implementation risk to Anthem's PBM strategy and relatively lower exposure to the faster-growing segments of the market, the analyst highlighted the company's recent strong execution. He initiated coverage of the stock with a Buy rating and a $323 price target. Also bullish on Centene, Hill started coverage of the stock with a Buy rating and a $62 price target as he sees the company as well positioned to grow market share in Medicaid and other MCO products organically and through its WellCare acquisition. He also argued that Centene could be an MCO consolidation target in the wave of industry M&A. Voicing a similar opinion on Molina Healthcare, the analyst initiated the name with a Buy rating and a $145 price target. He also sees the company as well positioned to grow market share in Medicaid, and a potential consolidation target in the wave of industry M&A.
Saying that the company is best positioned to benefit from the continued uptake in HDHPs and HSA balances, Hill initiated HealthEquity (HQY) with a Buy rating and $74 price target. The analyst also pointed out that HealthEquity should be able to gain market share and wallet share after completing its WageWorks acquisition. Additionally, Hill started both Teladoc (TDOC) and eHealth (EHTH) with Buy ratings and $76 and $173 price targets, respectively. The analyst sees Teladoc as well positioned to benefit from increased coverage of telemedicine services by various payers and increasing beneficiary utilization of telemedicine across a broader number of indications, and eHealth stock as the "most levered investment vehicle" to benefit from key trends that include the including the growth of Medicare Advantage, consumerism and choice in healthcare, and the increasing technological savviness of the aging population.
SELL WALGREENS, RITE AID, DIPLOMAT: Bearish on Walgreens Boots Hill initiated coverage of the name with a Sell rating and a $53 price target of $53. The analyst warned that the company's stand-alone pharmacy business strategy will face "unrelenting competitive and reimbursement pressure," which will likely yield negative earnings revisions. Hill added that the current "punitive" multiple on the stock is warranted.
Meanwhile, the analyst also initiated Rite Aid and Diplomat Pharmacy with Sell ratings and $5 and $4 price targets, respectively. He told investors that he is "skeptical" about Rite Aid’s regional strategy and warned about its declining EBITDA growth from continued reimbursement pressure. Additionally, the analyst said he sees Diplomat as a "subscale pharmacy focused on specialty drugs" and warned that the reimbursement and network market strategies will shifting volumes away from Diplomat.
ON THE SIDELINES: Noting that he already sees earnings growth expectations already factored into the current share price, Hill initiated UnitedHealth (UNH) with a Hold rating and a $263 price target of $263. The analyst also started Humana (HUM) with a similar rating and a $319 price target, saying that while the company is a leader in the Medicare Advantage space, it is only a "middling performer" in most parts of his selection framework. Further, Humana also trades at a premium valuation in the MCO space, he added.
Additionally, the analyst initiated McKesson (MCK), Cardinal Health (CAH) and AmerisourceBergen (ABC) with Hold ratings. While Hill is positive on the "structural position" of the wholesalers in the drug supply chain, he warned that the companies are faced with issues related to brand drug pricing, generic drug pricing, and domestic opioid litigation.
PRICE ACTION: In early afternoon trading, shares of CVS, Anthem and Teladoc gained about 1%, while Walgreens, Rite Aid and Diplomat have dropped about 3%, 16% and 7%, respectively. Also lower are Cigna, Centene, Molina, UnitedHealth, Humana, HealthEquity, McKesson, Cardinal and AmerisourceBergen. Meanwhile, eHealth's stock has advanced nearly 5%.